pendulums hitting earth pendulum The Obama-era guidance permitted plan fiduciaries touse ESG funds' collateral policy goals as "tie breakers" whenselecting one fund over another, so long as the two funds had equalrisk and return profiles. (Photo: Shutterstock)

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Last April, President Trump issued an executive order promotingthe further development of the country's energy infrastructure.

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One provision of the order instructs the Secretary of Labor toreview retirement plan data to determine if Environment, Social, and Governance mutualfunds made available to plan participants are limiting publicinvestment in energy companies.

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In April of 2018, Labor issued a Field Assistance Bulletinclarifying its previous guidance on ESG investments.

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The 2018 Labor guidance cautioned that retirement plan sponsorsand fiduciaries "must not too readily treat ESG factors as economically relevant to theparticular investment choices at issue when making a decision,"according to language in the document.

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The bulletin also said Labor's longstanding view is that planfiduciaries may not sacrifice investment returns in selecting anESG investment to promote those funds' "collateral social policygoals."

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That Trump administration guidance tempered what was viewed asmore favorable guidance for ESG adoption in qualifiedretirement plans issued in 2015 under the Obama administration.

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The Obama-era guidance permitted plan fiduciaries to use ESGfunds' collateral policy goals as "tie breakers" when selecting onefund over another, so long as the two funds have equal risk andreturn profiles.

A 3-decade long debate

The debate over ESG investing and its compatibility with plansponsors' fiduciary obligations under the Employee Retirement andIncome Security Act goes back to 1994 and was also addressed in2008 under the George W. Bush administration.

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As ESG investing in corporate and public retirement plans hasgrown, so has the Labor Department's interest in issuing fiduciaryguidance for ESG incorporation; and so has the spread ininterpretations from Democratic and Republican administrations.

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A study commissioned by the Labor Department at the end of theObama administration, and completed in 2017 after Trump's election,shows that by 2016, 30 percent of corporate defined contributionand defined benefit retirement plans offered or held ESGinvestments.

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About 24 percent of defined contribution plans offered ESGinvestments, according to the study.

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Public pensions have been even more active, holding between$2.74 trillion and $4.72 trillion in ESG assets in 2016.

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According to Morningstar, ESG funds realized $5.5 billion inflows in 2018, breaking record flows for the two previous years.Fund offerings totaled 351, a 50 percent year-over-yearincrease.

Legislation, not guidance, needed if DC sponsors are to buyin

While the momentum behind ESG investing in public pensions andoutside of qualified retirement plans is considerable, adoption ofthe strategy in 401(k) plans has been relatively slack.

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Data from Callan Associates shows only 16 percent of definedcontribution plans offer a dedicated ESG investment option. Andtake-up rates are low, as the funds account for only 2 percent ofplan assets when they are offered.

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Ethan Powell, CEO of Impact Shares, the nation's firstnot-for-profit issuer of ESG ETF funds, does not expect ESGadoption within ERISA 401(k) plans to grow until Congress—not Laborand other regulators—creates clearer, more permanent guidance forplan fiduciaries.

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"Adopting ESG in retirement plans is a fool's errand until weget some codification," Powell said in an interview.

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"Until we have longer-term legislative guidance, it doesn'tmatter what DOL says," he added.

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President Trump's executive order—the results of Labor'sstudy are due in October—effectively telegraphed thatfossil fuel-free portfolios are not consistent with sponsors'fiduciary obligations under ERISA, said Powell.

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Impact Shares, a registered 501(c)(3), issues three ETFs tradedon the NYSE. Powell says the funds address some critics of ESGfunds that allege their existing criteria are too amorphous.

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The firm's NAACP Minority Empowerment ETF, launched in July2018, tracks the Morningstar Minority Empowerment Index, which isdesigned to provide exposure to U.S. companies with "strong racialand ethnic diversity policies in plans, empowering employeesirrespective of their race and nationality," according to thefund's fact sheet.

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It's offered for 76 basis points. Of that revenue, 50 basispoints is returned to the NAACP after management costs arerecouped, Powell said.

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"Our social screens are publicly disclosed," said Powell, whosaid the fund is designed to engage discussion on best-in-practicepolicies, and not to browbeat companies that may not make thefund's list.

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The actively managed fund has 220 holdings. Bank of America, BNYMellon, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, andWells Fargo are among the financial services firm included in thefund. Several legacy energy companies are included as well.

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Powell, who previously was the executive vice president ofHighland Capital Management, says inroads into ERISA plans simplycan't happen, absent changes in the law, given the heightenedlitigation climate and fiduciary risk employer plan sponsors mustnavigate.

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"It won't matter what DOL says in October," he said. "Theconstant back and forth from administration to administration istantamount to a 'no' vote from sponsors. We need to be proactive incodifying legislation instead of letting DOL sway depending on whois in office."

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.